Last month I reported that 2016 sales volume was nearly identical to 2011 which was the weakest of the recovery years with the exception of 2010 when the recession officially ended. Disappointing sales in August dropped us even fu;rther below 2011 numbers. The housing recovery began in 2010, peaked in 2013 and has been slowing ever since. This may come as a surprise to those buyers still struggling to get an offer accepted on a home, or to sellers who are still fortunate enough to have multiple offers and a purchase price higher than expected. A surprise because prices continue to rise. In this case, however, rising prices are not the result of a hot market, but rather a symptom of the continued supply/demand imbalance.

Months of inventory demonstrates the correlation between inventory and sales volume. When sales are slow, inventory tends to build-up - in the absence of economic or political conditions causing seller to hunker down and stay put. Sales price however has little to do with sales volume. It responds to the basic economic factors of supply and demand. When supply outweighs demand, prices go down. An increase in demand and/or decrease in supply and prices rise. Median price demonstrates prices have increased since 2013 despite diminishing sales volumes. As of the end of August, 2016 sales volume is off 25% from 2013 levels while the median price is up 25%.

The best short-term predictor of price movement is the Absorption Rate - the rate at which listings are sold at a given point in time. This rate is obtained bhy dividing the number of closed sales by the number of listings available for sale. A low rate of 20% or less, like we had during the recession, indicates a strong buyer's market resulting in lower prices. The higher rates of 40-70% since 2012 indicate a strong seller's market with resulting price increases.

I will, of course, continue to track the market for you.

December 2016 Market Report

Mortgage Rates

8 Experts predict what the 2017 housing market will look like - what the next 12 months will hold in store for housing:

"The kind of rates we were getting earlier this year, down to 3.5 percent - those days are over" - Steve Cook, Editor of Real Estate Economy Watch said.

According to Matthew Gardner, Chief Economist at Windermere, "Even the best-case scenario suggests that the historically low rates that have been in place for the last few years are firmly in the rear-view mirror. My forecast is for the 20 year fixed rate to rise above 4.5% by year's end, and word case scenario, knock on the door of 5 percent."

What does it mean? Mark Fleming, Chief Economist at First American, said that if mortgage rates get closer to 5 percent by the end of 2017, he would expect home sales to decline by about 4 percent.

Inventory

Housing inventory - or lack thereof- was a big deal in 2016, and it will continue to be a problem next year, experts believe. As always, inventory will flutuate by market and price point. "The luxury market may very well see a surge if the new regime implements expected tax cuts," said Rodney Ramcharan, Director of Research at University of Southern California's Lusk for Real Estate. Prior to Trump being President-elect, there was a slowdown at the top end."

How mortgage rates will influence inventory

Because most housing inventory comes from the existing market (as opposed to new construction), what potential sellers decide to do in 2017 will have an impact on the market as a whole - and rising mortgage rates might not be great for sales. According to Fleming, "Existing homeowners with low mortgage interest rates might not be able to afford to move tinto a bigger house if it also comes with a higher rate." "Household psychology has affected people; they're willing to take less risk than they were in the past," said Duncan. "You can see that in the remodeling data. People are staying in place and remodeling their existing homes with a higher probability than in the past."

"The median tenure in homes is at an all-time high," noted Jonathan Smoke, Chief Economist at realtor.com. Part of that is ...the reasons people are purchasing tie into life events." "There's a cohort of baby boomers who might think it's in their best interest to stay put and make improvements so they can age in place." As recently as 2009 homeowners changed homes every 5 years. That has now doubled to 10 years.

Affordability

Affordability is based, primarily, on two factors - the cost of housing and the cost of money. With rising interest rates and rising prices, "We still think affordability is going to be a challenge in some of the largest markets in the U.S. like the San Francisco Bay Area" said Ralph McLaughlin, Chief Economist at Trulia. "When inventory supply is thin on the ground, and demand is unchanged, you can expect prices to go up." "The average price of a new home is increasing still," according to Cook, "we're not serving the mid to lower -tier market with new home construction. So you're not going to see much relief in affordability."

Mortgage rates and ability to buy

Svenja Gudell, Chief Economist at Zillow, suggests that, "in places like the San Francisco Bay Area where affordability is already an issue, seeing these small rate bumps will have a slight dampening effect, and we'll see that effect not on all buyers but specifically first-time homebuyers or lower income folks. People who are repeat buyers or buying hight-end homes won't fee it so much." "In general," said Gudell, "home values will slow their climb next year. "Currently we're looking a 6 percent-ish annual appreciation; next year it'll probably be half that, so a little bit of relacxation there, which will also feed into being more of a buyer's market by the time we reach 2018."

Alain Pinel Realtors® is the sixth largest residential real estate firm in the United States and the largest privately owned residential real estate company in California based on its closed sales volume.